Today in 10 minutes or less, you’ll learn:
- 🧰 Three key investing levers
- 🎯 Define your goals and risk tolerance
- 🌏️ Use International Brokers to save FX fees
- ⚡️ Four example asset allocations & ETF portfolios
- 💸 $1000’s of potential tax savings (as a non-American!)
P.S. I’m writing soon about expat side hustles. If you have one, reply or DM me. I want to hear stories! 🙏
🧠 Guide to setting up your expat investing portfolio
🧰 0. Understand key investing levers
When it comes to investing, David Swensen, GOAT fund manager of Yale’s Endowment Fund, said there are only three primary levers for impacting long-term performance:
- Asset allocation: what asset classes you buy
- Market timing: when you buy them
- Security selection: which financial instruments you buy within those asset classes
🔥 His hot take: Only one of these 3 levers actually matters for most investors: asset allocation.
The other two are kinda coin tosses. If you factor in fees/commission, then they are negative sum games.
🎯 1. Define your investing goals
Work backwards from your long-term lifestyle vision to set your investing goals, which influences your asset allocation.
Steps:
- Determine your ideal lifestyle. Be 100% honest with yourself. Consider things, experiences, people, and feeling state.
- Calculate your required cashflow. Breakdown the assets & returns you need to support your lifestyle.
- Choose a timeframe. Do you want to realize this cashflow in 5, 10, 20, or 40 years?
Example:
Let's say your ideal lifestyle will require you to generate $50k USD / year of passive income in 20 years. If you're expecting a 4% yield to generate this cash flow, then you'll need to build $1.25m worth of assets in 20 years.
If your current net worth is $250k, how will you grow your assets to $1.25m? 🤔
😈 2. Determine your risk tolerance
“Manage your money in a way that helps you sleep at night… Some people won’t sleep well unless they’re earning the highest returns; others will only get a good rest if they’re conservatively invested. To each their own.”
Morgan Housel, investor & author of Psychology of Money
Psychology is a massively underrated part of investing, especially in handling risk.
Be honest with yourself:
Can you really stomach 30-50% drops and then wait 2-3 years until recovery?
- If yes, you might be wired to optimize for the highest returns.
- If no, optimize for what helps you sleep at night. (as a light sleeper, this is what I do 😴 )
🏦 3. Open an international brokerage account
International Brokers is a popular choice for expats. Why they like it so much:
- Low trading & FX fees. FX: 0.002% with $2 USD min.
- Geographic flexibility. Most brokerages will shut down your account after you relocate. With IB, keep your account open even after you move abroad.
- Broad selection. Buy stocks and funds across 150+ markets.
Steps:
- Open an International Brokers account to buy your stocks/funds/ETFs.
- Setup automated transfers from your checking account to invest on a recurring basis.
🌏 4. Audit your portfolio for “home country bias”
“Diversification is about accepting good enough while missing out on great but avoiding terrible.”
Ben Carlson, investor & writer at A Wealth of Common Sense
Silicon Valley Bank’s recent collapse was a cautionary lesson on diversification. Diversification is all about managing your portfolio’s exposure to different risks, including country risk.
🏡 Watch out for “home country bias”. Over the last 50 years, global stocks generated higher reward-to-risk ratios than domestic stocks in most countries. Yet most people still keep the bulk of their stocks in their home country:
🇺🇸 US stocks are an exception. They outperformed and are arguably geographically diverse (40% of S&P 500 company revenue comes outside the US). Even still, a portfolio with 70% US / 30% international stocks showed a higher reward-to-risk ratio than a 100% US portfolio.
⛩️ Japan is a cautionary tale. Japan dropped from 40% to only 6% of world equities in under 40 years. Tough for the Japanese investors holding majority domestic equities 🤯
Steps:
- Check your existing portfolio for “home country bias.” Eg if you’re invested in stocks, compare your portfolio’s mix against your home country stocks as % of global stock market cap.
- Consciously decide how much you intend to allocate to your home country. Everyone has different goals. If you choose to diversify, you can look at the global stock indexes below.
⚖️ 5. Pick your asset allocation
Now that you have your goals, timeframe, risk tolerance, and brokerage account, it’s finally time to choose your asset allocation strategy 💪
Then set it and forget it. Rebalance once a year. Simple right?
Here’s a “starter pack” of four asset allocation strategies that are designed for expats under 45:
💨 1-fund strategy
Good for expats who want to buy 1 globally diversified ETF in 5 minutes and call it a day. Yes, seriously.
Example portfolio
- 100% Stocks: VWRA (non-US), VT (US)
⚡️ MAJOR tax-saving tips for non-Americans:
• Choose non-US domiciled ETFs to avoid US dividend & estate taxes, ie 30% US withholding tax on dividends and up to 40% estate tax on amounts over $60k. For example, funds domiciled in Europe / Ireland will (search for ”UCITS” in their fund name).
• Search for “Accumulating” in fund names to avoid paying foreign dividend taxes. For example, VWRA reinvests all the dividends back into the fund (reflecting higher fund price). Accumulating funds are better than dividend-paying alternatives for investors in countries that tax foreign dividends e.g. Singapore-based investors pay 30% tax on foreign dividends.
🥧 2-fund (”Pac-man”) strategy
The Pac-man strategy is a bit more diversified than the 1-fund strategy due to adding bonds to the mix.
Example portfolio
- 80% Stocks: VWRA (non-US), VT ( US)
- 20% Bonds: IGLA (non-US), BNDW (US)
Note: Actual holdings might not be 100% twinsies between the non-US vs US domiciled ETFs. Eg BDNW has more exposure to corporate bonds, but IGLA is government bonds only.
🔱 3-fund strategy
The 3-fund strategy is similar to the 2-fund strategy. It’s more flexible for adjusting your ratio of US vs international stocks over time.
Example portfolio
- 60% US stocks: VUAG/VWRA (non-US), VTI (US)
- 20% International stocks: VUAG/VWRA (non-US), VXUS (US)
- 20% Bonds: IGLA (non-US), BNDW (US)
Note: For non-US stock ETFs, there’s no direct substitute for VTI & VXUS. One alternative is to combine All World UCITS ETF (VWRA) and S&P 500 UCITS ETF (VUAG) to match US vs international stock mix.
🎓 David Swensen strategy
This fund strategy is inspired by David Swensen’s book for individual investors, Unconventional Success: A Fundamental Approach to Personal Investment.
Even though his strategy only has half the US stock allocation as a 60/40 portfolio, it still returned 8.6% per year over the 2010-2020 decade (vs 10.1% per year for a 60/40 portfolio). Given the high bond allocation, it’s a relatively safer approach for folks with less risk tolerance or approaching retirement.
Example portfolio
- 30% US stocks: VUAG/VWRA (non-US), VTI (US)
- 15% International stocks: VUAG/VWRA (non-US), VXUS (US)
- 5% Emerging market stocks: VFEG/VFEM (non-US), VWO (US)
- 20% US real estate: IUSP/IWDP (non-US), VNQ (US)
- 15% US intermediate treasury bonds: VUTA/VUTY (non-US), VGIT (US)
- 15% US Treasury Inflation-Protected Securities (TIPS): ITPS (non-US), SCHP (US)
Note: Same problem as 3-fund strategy. For non-US domiciled ETFs, consider combining VWRA and VUAG or comparable ETFs.
🌐 Beyond your borders
- How to be a digital nomad in Madrid (FT)
- Chinese reopening rally stalls as foreign investors cut purchases (Nikkei)
- US firms aim to pour billions Into Northern Ireland after Brexit deal (AJOT)
- Citizenship by investment programs on the rise in Africa (Quartz)
- 59% of expats concerned about tax implications of moving abroad (IA)
- How layoffs and the economy are changing the tech job market (Geekwire)
💫 The Ascending World
Get inspired to achieve your human potential. At Money Abroad, we believe strongly in learning and building in public. Our expat friend Viktor is publishing a weekly newsletter The Ascending World, which is a fantastic resource for insights into building startups in Southeast Asia, cultivating the right mindsets, and living abroad.
The Ascending World shares key insights from Viktor's experience building companies in SEA as a founder and business leader. Join here!
